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China allows trade settlement in yuan in Hong Kong

China approved use of yuan to settle cross-border trade with Hong Kong, part of a drive to broaden the use of the currency and reduce reliance on the US dollar.

Hong Kong Monetary Authority chief executive Joseph Yam (任志剛) said he hoped the first transactions would start next month after signing an agreement with People’s Bank of China Governor Zhou Xiaochuan (周小川) at the special administrative region’s airport yesterday. Zhou said the program would reduce foreign-exchange risks and transaction costs.

China is promoting greater use of the yuan in international trade and finance after Premier Wen Jiabao (溫家寶) in March expressed concern that a weakening dollar would cause losses on holdings of US assets. The greenback slumped on Friday in New York after the People’s Bank of China renewed its call for a new global reserve currency to replace the greenback.

“It’s an important step to make the yuan an international currency,” said Fang Ming (方明), an analyst in Beijing at Bank of China Ltd (中國銀行), the country’s biggest foreign currency trader. “In the long-term, the world reserve currency system will consist of several major currencies, including the yuan and the euro, instead of just the US dollar.”

The Dollar Index that measures the currency’s performance against six trading partners rose 0.4 percent yesterday after dropping 0.7 percent on Friday.

Zhou told reporters in Basel yesterday that the nation would not alter the composition of its US$1.95 trillion in foreign-­currency reserves suddenly.

The government said on April 8 it would allow Shanghai and four cities in Guangdong Province, including Shenzhen and Guangzhou, to settle international trade in yuan. Companies currently have to convert yuan into dollars or other currencies to settle international trade.

“Our long-term goal to promote Hong Kong as an overseas yuan trade settlement center for China and today’s arrangement is a big step towards this goal,” Hong Kong Chief Executive Donald Tsang (曾蔭權) told reporters before the signing.
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